Gold Rush Over
Or is it? Conflicting evidence (and price forecasts) abound. After a multi-year rally, gold is taking a “breather” say the bulls, whilst the more pessimistic see headwinds to gold prices persisting in the near-term.
By Guy Isherwood
THE GOLD PRICE has risen four-fold since 2005 to a peak of $1,921.15 set in September 2011. Last year’s gains – and volatility – were borne of widespread fears of a hard landing in China, systemic risk to the European single currency and the risks to US recovery posed by the impending ‘Fiscal Cliff’ and debt ceiling. Whilst these market conditions seem to have been
contained (at least for now), analysts are, nevertheless, collectively predicting a further increase of around 5% in 2013. However, gold prices fell 5% in February, ending down once again in the longest string of monthly declines since 1996 – and after 12 straight annual gains, the best run in at least nine decades. The metal is trading 18% below its nominal price record with this year’s drop to date taking it below the 200-day moving average. Outflows from gold ETPs have accelerated, and
hedge funds have significantly reduced their long positions as the spot price has fallen from its peak. The result: “The Gold rush is over”, we are told as the likes of Goldman Sachs and Société Générale call an end to the bull market. Goldman, for example expects $1,550/oz in a year’s time. Since the beginning of the year, gold ETPs have lost 140 metric
tons, with February seeing the
largest monthly outflow on record. Investors sold 103.7Mt, the most ever, according to Bloomberg data going back to 2003. Gold-backed ETP holdings have fallen to a 5-month low at 2,508.5 tons. Gold’s losses have come partly as a reflection of
broader negative sentiment towards the yellow metal as investors become more confident in the global economy and have put their money into riskier assets. “The dollar strength seen during February helped to reinforce the negative sentiment, while the risk-on sentiment currently witnessed in global stock markets
... gold prices fell 5% in February, ending down once again in the longest string of monthly declines since 1996
(especially in the US where the Dow Jones Index has scaled new highs) has also been creating headwinds,” says Ole Hansen, Head of Commodity Strategy with Saxo Bank. “Every single piece of positive economic data from the US – of which we have had quite a few lately – has triggered an almost automatic sell reaction from algo traders,” he confirms.
Gold traders are now divided on the outlook for
prices. That the bullish gold consensus is over is not in doubt. The markets are now divided into those who still justify the magic $2,000/oz price target (either this year or next) and those who sway towards a sustained global recovery amid a stronger dollar and higher real interest rates – a sour cocktail for gold in a low inflation environment. All bets now rest on the scale and pace (or derailment) of the global recovery.
1,000 1,100 1,200 1,300 1,400 1,500 1,600 1,700 1,800 1,900 2,000
Gold Trading in Well Established Range Since 2011 US$/oz
1,000 1,100 1,200 1,300 1,400 1,500 1,600 1,700 1,800 1,900 2,000
2010 Source: Bloomberg
Range-Bound Market The gold price has traded in a volatile but well
established range of $1,500 – $1,800 since August 2011; unimpressive compared to the strong gains that followed the outbreak of the global financial crisis. However, “even such an extended pause is not a sufficient basis for arguing that the bull market is over,” according to Julian Jessop, Head of Commodities Research with Capital Economics. “Demand from emerging economies and their central banks, although erratic, has continued to run at historically high levels.” However, even news that another central bank (this time South Korea) bought 20 tonnes of gold during February had little impact on the negative sentiment which was given further headwind from the major bullion houses that have been busy reducing their price forecasts. Most have now downgraded their gold price forecasts, if only marginally in some cases. In a recent note Jessop reminds us of the three main factors recently undermining gold. The first
March 2013 25 2011 2012 2013
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